Question

The SEC dropped the requirement that foreign private issuers who list in the U.S. have to reconcile their earnings to US GAAP for FPIs that use IFRS as published by the SEC in English. What are some of the reasons the SEC took this step? Consider implications, including costs, for companies that report on multiple stock markets. Additionally, what are potential implications of this action for users of financial statements, such as US investors?

Answer 1

The primary reason why SEC took this step (i.e. to drop the requirement that foreign private issuers who list in the U.S. have to reconcile their earnings to US GAAP) was to reduce the disparity that existed between the accounting practices of USA and other countries. By reducing the disparities the protection level that will be accorded to investors will significantly increase. Furthermore it will lead to increased level of efficiency of the capital markets.

The use of IFRS will not only lead to greater comparability (an advantage for investors) but also lower the cost for private issuers. SEC wants to foster a single set of globally accepted accounting standards and hence it took this decision.

The operational costs will fall for those companies that report on multiple stock markets. This is because these companies will no longer be required to reconcile and restate their earnings as per different accounting standards. They can adhere to the IFRS as issued by IASB and this will reduce both their operational as well as compliance costs.

Potential implication of this action for users of financial statements will be that the interest of the users will have greater level of protection and the users will be in a better position to understand and comprehend investment opportunities outside USA more clearly and more meaningfully.